The ISM Non-Manufacturing Index, the broad index of services activity in the United States, slipped in June to 52.2 from 53.7 in May. Economists surveyed by Reuters had forecast a reading of 53.7.

Output Drops

The broad measure of the health of the services economy across the U.S. dropped in June and cancels out a positive manufacturing report from earlier this week. The ISM index, a PMI, indicates growth when it reads above 50 and contraction below 50. Therefore in June, the service economy expanded less than it did in May but still showed expansion.

Weakness was driven by lower production and export orders, which both dropped sharply in June. The index or production fell to 51.7 from 56.5 in May, showing a much lower level of output in the month. Also, new export orders contracted in June as the export index fell to 47.5 from a flat 50.0 reading in May as foreign demand slumped in the month.

A key strong point of the report was the ISM's employment indicator. The index of employment strength rose sharply to 54.7 from 50.7 in May in a sign that employment growth in the largest part of the economy accelerated in June from May. However, the manufacturing employment index showed a contraction in payrolls in June, creating lots of uncertainty on the labor market heading into Friday's Non-Farm Payroll reading.

Other employment data released Wednesday reflected the service data that employment gained more strongly in June than in May despite the weak manufacturing employment figure. The ADP Employment Survey revealed that the private sector added 188 thousand non-farm jobs, more than the anticipated gain of 160 thousand, and jobless claims fell from last week.

Weak Leading Indicators

Despite the strong employment figures, weakness in two key leading indicators in the report reflects the broadly weak report and negative sentiment surrounding the index. The New Orders Index, a key leading indicator for the future of the broader ISM Non-Manufacturing Index, dropped sharply to 50.8 from 56.0 in May, showing that future output may slow in July and August.

Meanwhile, the stock of inventories rose in June sharply as the inventory index rose to 54.5 from 51.5. Rising inventories usually implies that future production will slow as companies choose to first sell out their inventory before producing more goods, or in this case services.

Gold Bounces

Gold jumped on the news as the weaker than expected figure could mean that the Fed is less likely to taper as soon as July, as some reports indicated the Fed would only a few weeks ago. The front-month gold future climbed nearly one percent in early Wednesday trade to $1,254.70 per ounce. Meanwhile, S&P 500 futures bounced back to 1,604 after trading near 1,598 before the release.